The race to base benefits on staff performance is picking up pace, and financial rewards may no longer be the most suitable form of renumeration, says Debbie Lovewell
Case Study – Bromford Housing Group
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The scene could be straight out of Big Brother – that’s the Orwellian version, not the trashy reality show. Warehouse staff are being electronically tagged at work so bosses can monitor exactly what employees are getting up to and how long they take to complete any given task.
Although still in its infancy, the concept highlights the lengths employers are willing to go to to ensure they are getting the best from staff. So basing employees’ reward packages on their level of performance would seem like a logical step. Steve Watson, director of consultancy firm Rewardworks, explains: "It’s a fundamental human need to [receive] feedback on performance. It’s a cultural thing and a lot of people want differentiation."
One of the first steps for employers is to decide which staff they want such a scheme to target. The days of focusing performance-based reward on high-flying executives and sales staff are over. Andrew Page, a director in KPMG’s People Service’s department, explains: "[One] trend we’ve seen in the market is a move away from looking at financial performance. Organisations are thinking about targeting people that make a difference to the business and customers. It’s around the type of behaviour [firms] are trying to drive. You can really capture the skills of staff further down the organisation."
He cites the example of Boots, which operates a staff bonus scheme based on a mystery shopper exercise. Instead of scoring employees on the number of sales they make, factors such as shop layout, the condition of stores and the helpfulness of staff are taken into consideration. This means that employees such as pharmacists, who may not have a great deal of opportunity to directly boost sales can be rewarded for their overall contribution to the business.
This type of scheme is particularly suited to service-based industries, where staff may view bonuses determined by financial performance or share awards as too remote for them to influence from their position in the company. Lynda Hatcher, HR consulting director at Ceridian Centrefile HR Consulting, explains: "It’s about consistency and alignment. It’s really important about aligning the reward package with the organisation. Some of the localised recognition schemes can work very well, but the challenge is whether they align with or water down [an organisation’s] strategy."
A study by the Chartered Institute of Personnel and Development and the Institute of Customer Service at Aston University Business School, for example, highlights the problem of basing performance-related pay schemes in call centres on the number of calls taken, which can adversely impact on customer service.
A further trend currently circulating among organisations is a link between non-financial reward and performance. The Royal Mail is perhaps the most high-profile example, offering staff the chance to win cars and holiday vouchers if they did not take a day off sick for six months.
Mark Thompson, head of reward at the Hay Group, says: "The main point I would say is that if you have a lot of money then benefits are better than cash." But he adds that the same is true at the opposite end of the scale. "It’s very powerful if you are short of money and very visible. A surreptitious few pounds in the pay packet won’t win anyone over. It’s a question of managing expectations. It’s not about incentivising the hell out of people, but recognising their achievement. The problem is that it [can become] so competitive that people don’t know what they are being rewarded for."
But that doesn’t mean to say that pay and financial incentives don’t have a place in performance-based schemes. Bruce Thompson, senior lecturer in human resource management at Middlesex University Business School, believes that this type of approach is still more commonplace. "You are not getting an awful lot of links between benefits and performance at the moment. There’s a lot of talk about it but benefits are usually linked to [things like] an organisation’s philosophy."
Performance-related pay is one of the more well-known options available to employers, however, with employees’ performance liable to fluctuate, it can be difficult for employers to determine salary levels. "What many organisations have found is that [performance] is linked into salary but [staff] performance goes up and down so it is hard to ratify salary," explains Page.
Bonuses and variable pay, however, overcome this problem. But employers should ensure that they think strategically and not go in with all guns blazing when putting a scheme together. Hay Group’s Thompson cites the example of large investment banks that offer bonuses which are more substantial than employees’ base pay. While this will undoubtedly boost staff performance, the fact they will go to any lengths to ensure they don’t miss out means those considering leaving a firm typically wait until the day after bonuses are paid before resigning en masse.
In contrast, incentivising staff with shares or share options not only helps boost performance, it can also encourage employee engagement with their company. Firms can give staff who meet performance targets additional shares or options through one of the Inland Revenue approved schemes – the share incentive plan (Sip), or the company share option plan (Csop) – or they can tailor a scheme to meet their own needs. Currently, option-based schemes such as the Csop or the myriad of executive option schemes are losing popularity because since January the options have had to be accounted for in company profit and loss accounts.
Whether an employer is in the public or private sector will also influence which form of reward best suits. Public sector organisations, for example, find it harder to measure individual performance because they lack financial results. "The public sector never talks about performance-related pay because [they are] dirty [words to it]. Instead it talks about contribution pay, where people are assessed against competency. The idea that someone should get a bonus and another doesn’t, doesn’t fit with the culture," says Middlesex University’s Thompson.
Working out how performance should be measured, however, can be tricky. "You always have to determine what performance is, and how you reward it is a gimmick. It’s a side issue really as to how [the reward] is delivered. It’s a cultural thing [whether it is accepted] that there’s a differential on performance and you’ve got to be able to measure [performance] fairly. If you can’t, you may as well not bother," says Rewardworks’ Watson.
The development of management systems means employers no longer have to use financial indicators as the main determinant of staff performance. Valid measures now include staff turnover, absence levels, employees’ development and how they meet primary business measures such as customer or client satisfaction.
It’s also vital that staff know what their performance is measured against. "People don’t mind being paid more or less if a difference [in performance] is visible. People accept differentiation. Every organisation, whether in the public or private sector, has targets [which] they have to meet. The system people use is far less important than the culture and how they put things in. If you have the right culture, you can almost start with a blank piece of paper," explains Middlesex University’s Thompson.
So if staff know what they stand to lose if their performance doesn’t make the grade, it can be a powerful incentive to try harder. But that doesn’t mean it will always work: just look at the Met Office staff who last month were reported to have lost out on performance-related bonuses of up to £500 after getting weather forecasts wrong just a little too often.
Case Study: Bromford Housing Group
Bromford Housing Group offers a range of performance-related reward for staff.It switched to the scheme, which includes competency-based pay, individual and team bonuses, in April this year at the request of staff.
Nina Park, HR project manager, says: "Before, we had a very traditional points scale and the feeling was that colleagues felt it would be fairer for people to be paid for how good they were at their jobs."
Managers in the not-for-profit organisation are trained on the measures against which staff are assessed. "Each job has its own competency profile and we very much rely on managers to be doing one-to-ones and quarterly reviews," adds Park.
Employees were given the option to opt in or out of the new pay system but 98% of staff chose to go with it. "So far, everyone has been very enthusiastic but we recognise that in the next 12 months we need to be very transparent in how we are monitoring the assessments that are being made."